Strategic Alliances 1

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Strategic Alliances

Global Supply Chain Management

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Introduction

Complexity business environments is up Resources required to manage are becoming

increasingly scarce Flexibility is required, so: focus on core

competencies and meanwhile build alliances

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Why strategic alliances? Adding value to products (adding services) Improving access to markets Strengthening operations (quality, efficiency) Adding technological strength (efficiency,

opportunities) Enhancing/allowing strategic growth

Downside 1: core competencies should not be compromised

Downside 2: competitive advantages should not be compromised

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Main Types of Strategic Alliances

Third Party Logistics (3PL) Retailer–Supplier Partnerships (RSP) Distributor Integration (DI)

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Third Party Logistics (3PL)

Use of 3PL providers to take over a company’s logistics functions and even more……

About 40% (20%) of all logistics efforts (expenses) in 2013 (2008) due to 3PL

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What Is 3PL? Strategic partnership Long term commitment, multi-function

arrangement, process get integrated Large range of 3PL companies, some are

in trucking, other in DCs or WHs, or in containers, or in DC or WH technologies

Non-asset owning 3PL companies: 4PL– More holistic, on top, managing a whole network– Provide services, so no trucks or warehouses– Marketing/sales, IT-services/web sites, payment

(example: Amazon !), but could also entail reverse logistics, e.g. for repair or maintenance

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3PL Advantages Focus on Core Strengths

– Allows a company to focus on its core competencies

– Logistics expertise left to the logistics experts

Provides Technological Flexibility – Technology advances are adopted by 3PL

providers, company can benefit – So by using technology (IT and other

technologies) 3PLs may help meeting needs of a company’s potential customers

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3PL Advantages

Provides Other Flexibilities – Flexibility in geographic locations – Flexibility in capacities/infrastructure– Flexibility in service offerings – Flexibility in resource and workforce size

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3PL Disadvantages Loss of control inherent in outsourcing a

particular function. – In case of outbound logistics the 3PLs interact

with a firm’s customers..…..– Company and 3PL can address this:

• Painting company logos on the sides of trucks, dressing 3PL employees in the uniforms of the hiring company, providing extensive reporting on each customer interaction.

In case Logistics is one of the core competencies of a firm– It makes no sense to outsource these activities to a

supplier who may not be as capable as the firm’s in-house expertise• Large groceries, pharmaceutical companies

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Retailer-Supplier Partnerships

Cooperative relationship between suppliers and retailers to use one another’s knowledge

Suppliers have better knowledge of lead times and production capacities

Retailers have better knowledge of demands

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Types of RSPQuick Response

Suppliers receive POS data from retailers Suppliers use this information to

synchronize their production and inventory activities with actual sales at the retailer

Retailers still prepare individual orders POS data are used by suppliers to improve

forecasting and scheduling and to reduce lead time

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Types of RSPContinuous Replenishment

Also called rapid replenishment Suppliers receive POS data Suppliers use these data to prepare

shipments at agreed-upon intervals to maintain specific levels of inventory

Advanced form of continuous replenishment– Suppliers may gradually decrease inventory

levels at the retail store or distribution center as long as service levels are met.

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Types of RSPVendor Managed System (VMI)

Often called vendor-managed replenishment (VMR) Supplier decides on the appropriate inventory levels and

on the inventory policies to maintain these levels Supplier suggestions initially approved by retailer Wal-Mart and Procter & Gamble VMI

– Partnership, begun already in 1985– Has improved P&G’s on-time deliveries to Wal-Mart while

increasing inventory turns

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Main Characteristics of RSP

Criteria →Type ↓ Decision maker Inventory Ownership

New skills employed by vendors

Quick response Retailer Retailer Forecasting skills

Continuous replenishment

Contractually agreed-to levels Either party

Forecasting and inventory control

Advanced continuous replenishment

Contractually agreed-to and continuously improved levels Either party

Forecasting and inventory control

VMI Vendor Either party Retail management

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RSP Requirements Presence of advanced information systems Top management commitment

– Especially because information will be shared across companies

A level of trust among partners– Supplier manages retailer’s inventory– Retailer provides sales information to supplier– Reduced inventory leads to space savings etc.

• Can it be given to competitors ?

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RSP Inventory Ownership Who makes the replenishment decisions? Who owns the inventory until it is sold?

– Consignment relationship in VMI programs• Supplier owns the inventory until it is sold

Issues with consignment relationship:– Retailer lowers inventory cost– Supplier can manage inventory more effectively, but

also higher costs because of longer inventory holding– Supplier can move as much inventory as allowed– Power relationship between supplier and retailer may

influence supply contract when addressing savings

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Positive aspects of RSP Better knowledge the supplier has

about order quantities gives– an ability to control the bullwhip effect– Shorter LTs, lower stock levels

Provides an option for reengineering of the retailer–supplier relationship.

• eliminate redundant order entries • manual tasks can be automated• reassign tasks for better efficiency• eliminate unnecessary control steps

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Difficult aspects of RSP (1) It is necessary to use advanced, expensive

technology It is essential to develop trust Often the supplier ends up having more

tasks than before, forcing the supplier to build new capabilities and/or add personnel to meet this responsibility, all leading to higher expenses as well

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Difficult aspects of RSP (2) Arrangement may increase inventory

costs for the supplier as retailers may force the supplier to own the inventory until goods are sold

Retailers may more easily monitor suppliers and make decision on their performance. Leading to enhanced competition between suppliers

Forward integration (e.g. DE) Backward integration (e.g. AH)

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Example Tesco Tesco

– What are the advantages and disadvantages of the VMI for Tesco?

– What are the advantages and disadvantages of the VMI for Tesco’s suppliers?

– Why did only a few suppliers fundamentally change the way they work?

– Success or Failure?

Distributor Integration (DI) Distributors an important partner in the

supply chain Distributors have a wealth of information

about customer needs and wants– Successful manufacturers use this information

when developing new products, product lines.

Distributors typically rely on manufacturers to supply the necessary parts and expertise

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Changing views on Distributors

Strong and effective distribution network cannot always meet challenges– Rush orders cannot be met by the inventory….– Customer might require some specialized technical

expertise that the distributor does not have…. In the past, issues were addressed by adding

inventory and by adding personnel Modern IT now may offer another solution:

– Distributor Integration• Expertise and inventory located at one distributor is

available to the other distributors.

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Types of Distributor Integration Addresses inventory-related and service-related issues

– Inventory pooling across the entire distributor network– Each distributor checks inventories of other distributors to

locate a needed product or part. – Dealers are contractually bound to exchange the part under

certain conditions and for agreed-upon remuneration. • lowers total inventory costs • increases service levels.

Addresses customer’s specialized technical service requests– Steer such requests to those distributors best suited to handle them – Example: Centers of Excellence at Otra

(a large Dutch holding company now part of Sonepar, see http://www.sonepar.com/group/sonepars-history)• electrical wholesale subsidiaries• some designated as centers of excellence • other subsidiaries, as well as customers, are directed to these

centers of excellence to meet particular requests– Services/capabilities pooling: you do not need to have all services

in house in order to offer them

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Issues in Distributor Integration Distributors may be skeptical of the rewards of

participating in such a system– Participating distributors will be forced to rely upon other

distributors, some of whom they may not know, to help them provide good customer service.

– Tends to take certain responsibilities and areas of expertise away from certain distributors, and concentrate them on a few other distributors. It is not surprising that distributors might be nervous about losing these skills and abilities.

The Distributor Integration relationship requires fulfillment of a challenging set of conditions:– large commitment of resources/effort by the manufacturer– pledges and guarantees from the manufacturer to ensure

distributor commitment– a long-term alliance – trust among the different participants (the distributors)

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SUMMARY Various types of partnerships can be used to manage the

supply chain effectively. 3PLs are becoming more prevalent:

– Both advantages and disadvantages to outsourcing the logistics function

– Many important issues to consider once the decision has been made and a 3PL agreement is being implemented.

RSPs are also becoming common:– Issues and concerns relating to the implementation of RSP

types of arrangements Distributor Integration (DI):

– Risk-pooling opportunities are created across the various distributors,

– Enables different distributors to develop different areas of expertise.

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